Stock of the Week Avoca Resources Ltd (AVO)

Avoca Resources Ltd (AVO) is a gold producer focused on becoming the next Australian mid-tier gold mining company, and is currently one of the hot stocks in the ASX 200.

AVO’s base operation is its Higginsville Gold Project in Western Australia, which contains the Trident Underground Mine, AVO’s trump card.

Higginsville is an emerging new gold belt, and AVO is the most active company operating in this area. The region has also provided for a string of impressive resources upgrades for AVO, as recently as last month.

The company now calls itself “The New Avoca” after its recent takeover of fellow West Australian goldfields company Dioro Exploration. With a much larger resource base under its belt, AVO is targeting 400,000 ounces per annum in FY13.

The group has recently impressed with stellar 1H10 results, where it swung a profit from a prior-year loss, and its 1Q10 results, which bode well for a profitable full year for Avoca Resources.

The company is also well-placed owing to strength for its metal of choice, gold. Though gold has come down from recent highs over the last few weeks, the precious metal is expected to enjoy further gains on current global economic volatility.

Another Upgrade

The Higginsville mine has seen plenty of resource upgrades since it was purchased by AVO.

The mine has garnered a lot of positive attention owing to its low cash operating cost, which is very impressive for an underground mine.

AVO has released a number of resource upgrades for Higginsville, the most recent coming last month.

The company upgraded the Higginsville mining reserve to 803,000 ounces of gold. Including production of 254,000 oz, the reserve has increased 38% from the previously published 763,000 oz.

AVO is confident that it can maintain the mine’s production at 180,000 to 200,000 oz per annum.

Additionally, AVO announced that its South Kalgoorlie operations produced a record 12,222 ounces of gold during May 2010.

A Lucrative Takeover

Further broader production upgrades may be in AVO’s future, now that the group has taken over West Australian goldfields group Dioro Exploration, a group which boasts a 49% interest in the Frog’s Leg mine and control of the Coolgardie to Jubilee belt.

The addition of Dioro to AVO means the combined group will have annual production of +280K oz, two 1.2Mtpa plants, +1.2M oz in reserves and +3.7M oz in resources.

AVO will have access now to the largest tenement holding and complete treatment coverage of Australia’s richest gold belt, the 150 km Kalgoorlie to Norseman belt.

AVO is presently mulling over buying the 51% of the Frogs Leg gold mine that it didn’t acquire through the takeover.

The owner of the stake, Canada’s La Mancha Resources, says the stake is not for sale. However, if it becomes available AVO has pre-emptive rights over the stake.

The Safe-Haven Metal

Whilst miners have struggled with volatile metals prices of late, gold has been considered the one safe-haven metal, and is forecast to continue strongly into the future.

Gold offers investors protection against inflation and is also seen as a store of value when other asset values are falling.

Although global markets have to an extent stabilised, panic surrounding equity markets has not been completely erased. Even though gold has now dropped to its lowest level in six weeks, this is off recent record highs – and further strength is forecast.

A Bloomberg survey found the majority of analysts are forecasting a climb for gold next week.

Gold is expected to make continued medium-term gains on financial turbulence in Europe and on concern the global recovery may slow.

A String of Stellar Results

In February, AVO posted a net profit of $34.6 million for its December half, impressively spun from a loss of $14.7 million in the previous year’s December half.

Revenue for the half more than doubled to $121.6 million whilst AVO did not pay an interim dividend, in line with last year.

The company confirmed gold production of 101,536 ounces, meaning it’s well on track to achieve its full year forecast of 190,000 oz.

In late April, Avoca Resources reported its 1Q10 results, clocking production of 58,946 troy oz of gold.

Gold sales totalled 62,422 oz at an average price of $1,215/oz.

The result showed the benefits of AVO’s acquisition of fellow West Australian goldfields Dioro Exploration.

The company expects production in the June quarter of about 77,000 oz.

It forecasts full year production of 238,000 oz – 198,000 oz from its Higginsville project and 40,000 oz from its South Kalgoorlie mine.

Outlook

AVO posted a net profit of $34.6 million for its December half, remarkably spun from a loss in the previous year’s half, whilst 1H10 revenue doubled, impressing the market.

AVO’s strength comes from its lucrative resource base. The company recently yet again upgraded the Higginsville mining reserve, this time to 803,000 ounces of gold.

The Higginsville reserve has increased 38% from the previously published 763,000 ounces.

AVO’s takeover of Dioro Exploration is a massive boon for the company: the combined group will have annual production of +280K oz, two 1.2Mtpa plants, +1.2M oz in reserves and +3.7M oz in resources.

AVO will now also have access to the largest tenement holding and complete treatment coverage of Australia’s richest gold belt, the 150km Kalgoorlie to Norseman belt.

Though gold prices have slipped slightly in the last few weeks, the majority of analysts are forecasting a climb for gold next week and generally into the future on concerns the global economic recovery may slow.

The Australian shares graph for AVO has surged from approximately $1.50 to a high of almost $3.00 since February 2010, maintain a strong up trend. Its share price last closed at $2.80.

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